Creating IT-enabled Business
Options
Agenda
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MIS Research Center
Carlson School of Management
University of Minnesota
November 12, 2004
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Rajiv Kohli, PhD
University of Notre Dame
rkohli@nd.edu
Why does an organization want
technology justification?
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What are the CFO’s real concerns?
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What are the CIO’s fears?
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What is the objective of an IT
investment justification?
Why justify IT investment?
What are business options?
Process of creating business options
Where are the ‘options’ opportunities?
Business Options cases from
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Trinity Health
GE Aircraft Engines
UPS – video clip
BREAK
How to prepare for creating business options?
Weaknesses and Opportunities
Issues in creating business options
Traits of option exploiting organizations
IT Justification is important …
…but not executed well
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86% of IS professionals believe that IT
value is a priority, but under 15%
conducted post-implementation
measurement*
Commonly used retrospective approaches
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Cost-Benefit analysis
Net Present Value (NPV)
Return on Assets (ROA)
Total Cost of Ownership (TCO)
*Source: Giga Group survey
Most financial justification approaches
consider tangible investments only
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How do we account for investments
that create assets that provide
agility to businesses?
Benefits
First mover
Killer Apps
? Process superiority
? Flexibility to launch products quickly
? Improved image from greater reliability
? Tighter integration with partners
? Compatibility with other products
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What are IT-enabled business options?
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IT-enabled business options are
choices afforded, but not necessarily
anticipated, from
? IT investment to
? exploit business opportunities to
? derive competitive advantage
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1
Creating Business Options
Flexibility or Agility as a
Business Option
A process
nd
Option
2 Investment
Asset
IT Strategy
A
Airlines:
Option
Aircraft
Entrepreneurial
Alertness
IT Investment
Business
Strategy
IT
Assets
IT
Competencies
B
Revenue
C
Firm-level
capability
Information
Technology
Server
Capacity
Business
Application
e.g. Online Banking
Land’s End Virtual Model
D
Business
Options
Revenue or
Business Benefit
Strategic thinking
And second
Investment
Source: Giga Group
Opportunity
IT
Investment
Options
Enabled
Competitive
Advantage
E
Adapted from Sambamurthy et al. (2003)
Where are the opportunities for ITenabled business options?
Where are the opportunities for ITenabled business options?
Cost Mgt
Cost Mgt
Design
Production
Logistics
Fully allocated
costs; ABC
Integrate Mfg.
and Design
Computer
Aided Mfg.
Cost
Information
Systems
Knowledge
Based Systems
Robotics linked Real time
with design and samples, tests,
admin. systems modification
• BPR
•
Mfg. Errors
Designers
Knowledge
• Rapid Develop.
• Simulated
Testing
• Quick
• Rapid
• TCO,
• Use
• Design
• Scheduling
Pricebased-Costing
• Contracting
• Niche mktg.
• AMT Choices
changeovers
Input
• BOM – Costs
• Update Design
Link Dispatch,
Warehouse, QC
Transportation
Raw
Materials
• JIT
Options creation at AirTran and JetBlue
Managing Costs lead to lower cost per
seat/mile
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Source: How Discount Airline Profited from the Bigger Rivals Woes
Wall Street Journal August 12, 2004
Logistics
Integrate Mfg.
and Design
Computer
Aided Mfg.
Cost
Information
Systems
Knowledge
Based Systems
Robotics linked Real time
with design and samples, tests,
admin. systems modification
• BPR
•
Mfg. Errors
Designers
Knowledge
• Rapid Develop.
• Simulated
Testing
• Quick
• Rapid
• TCO,
• Use
• Design
• Scheduling
Pricebased-Costing
• Contracting
• Niche mktg.
• AMT Choices
changeovers
Input
• BOM – Costs
• Update Design
Link Dispatch,
Warehouse, QC
Problem
Detection
Transportation
Raw
Materials
• JIT
Options Payoff for AirTran, JetBlue
“… keep on giving”
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New planes
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Purchase profitable routes
Sweet deal on canceled Boeing plane orders
Hire experienced laid off workers
* With apologies to Michael Porter
Options
Enabled
Production
Fully allocated
costs; ABC
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US Airways 11.8c
AirTran 8.4c
JetBlue 5.9c
Leads to Available Cash
Cash gives opportunities to invest in
business options
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IT
Investment
Problem
Detection
Cost Mgt can lead to Competitive Advantage*
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Opportunity
Design
Additional Routes
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Higher occupancy rate
Connections to more cities
Hiring laid off workers
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Lower fuel costs and maintenance costs
Happier customers
Lower pay scales
Younger employees have lower medical bills
More cash
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Lower capital borrowing costs
Lock-in lower fuel prices with hedges
Source: How Discount Airline Profited from the Bigger Rivals Woes
Wall Street Journal August 12, 2004
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GE Aircraft Engines
Trinity Health ’s Adverse Drug Event
(ADE) System
UPS Worldport Operations
- Video clip
BREAK
Business
Options at
UPS
IT Strategy
Industry Examples of IT Enabled
Business Options
•Interface systems with Customers
•Manage packages
•Design and develop new services
•Manage Customer Relationships
Business
Strategy
•Synchronize
commerce
•Perceived as a
trusted broker
•Use
technology to
create new
services
IT Investment
A
IT Assets
•E-procurement
•Package flow
optimization
•RoutingHub
•Hub simulation system
•Campus Ship Web
based system
B
IT Competencies
•Pricing of services
•Shorter routes
•Fix incorrect
addresses
•Resource planning
•Customer supply
chain visibility
Entrepreneurial
alertness of
competitive forces
C
F i r m-level capability
•Visibility of goods in transit
•Optimized processes
•Single source service provider
•Access to customer supply
chain
Business Options
•Outsource unprofitable routes
•Reduce delivery time by 1 day
•Intercept, reroute packages
•Labor, equipment flexibility
•Target new services to
customers
D
E
Competitive Advantage
•Cost focus
•Leader in understanding
logistics processes
•Reputation for high quality
reliable service
•Barriers to competitor entry
Second Investment in
know- how, IT and
warehouses
Expected Outcomes from Business
Options
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Caveat - IT-enabled business options are
‘price of entry’ which must be availed to
create outcomes
Outcomes include
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Weaknesses of IT-enabled business
options
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New business opportunities – GE, UPS
Risk mitigation – Trinity Health
Improved customer service – UPS, Land ’s End
Cost Control – Holy Cross Health System
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Cost control in competitive markets can
be as valuable as other outcomes
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Reducing risk from IT-enabled
investment in business options
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Cost reduction
Improved time to market
Greater accuracy or quality of products
Partner with business leaders
Fix ‘pain’ points of the organization
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Lost contract bids
Aggressive competitor
Causes of litigation
business option might not payoff
limit future options by being locked into an IT
infrastructure
short shelf life of the option – when
competitors or vendors create better options
Time consuming strategic thinking and
planning
Drain on people and systems resources
Requires spending ‘political capital’ when
the outcomes are unclear
How to Prepare for IT-enabled
Business Options?
Cost Mgt
Identify dual purpose IT investments that
also accomplish
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Risk
•Unclear
•No
Impediments
strategy
immediate ROI
•Resistance
cutting
to cost
•Strategy
Resolutions
to exploit
cost information
•Allocate profits to
develop systems
•Communicate
consequences
Resources
Needed
Benchmarking data
Managers ’ deep
knowledge
Plans to address
scenarios under
various situations
Operations
•Lack
of
communication
between functions
job
flexibility
Logistics
bargaining
power
of integration
•Limited
•Higher
•Lack
•Customers ’
•Limited
•Substantial
•Forum
for dialog
•KM sharing
incentives
•Build
•Engage
•Join
customers
in design and test
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Cross functional
teams
Hybrid managers
Cross trained
employees
Involved
customers
Customer
Service
investment
IT
SCM partner
alliances
•Start with one
an e-Hub
•Demonstrable
contribution to
partners
engine
customer
expectations
unwilling to pay
•Provide
something
of value
services
with products
•Bundle
•Merge
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•Interface
•Deep
understanding of
business processes
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IS into CRM
Integration of
upstream systems
Highly trained
customer reps
Centralized
database
Data standards
3
How to Prepare for IT-enabled
Business Options?
Cost Mgt
•Unclear
•No
Impediments
strategy
immediate ROI
•Resistance
cutting
to cost
•Strategy
Resolutions
to exploit
cost information
•Allocate profits to
develop systems
•Communicate
consequences
Resources
Needed
Benchmarking data
Managers ’ deep
knowledge
Plans to address
scenarios under
various situations
Operations
•Lack
of
communication
between functions
job
flexibility
•Higher
•Lack
bargaining
power
of integration
•Customers ’
•Substantial
for dialog
•KM sharing
incentives
•Build
•Engage
•Join
investment
•
Cross functional
teams
Hybrid managers
Cross trained
employees
Involved
customers
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Can Knowledge Management and Discovery
initiatives be tied to Options?
customer
expectations
Knowledge
Bearing
Component
unwilling to pay
IT
SCM partner
alliances
•Start with one
customers
in design and test
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Customer
Service
•Limited
•Forum
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Some partly baked ideas
Logistics
•Limited
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Issues in Business Options
•Provide
something
of value
services
with products
Knowledge
Integration
(IT ’s role)
•Bundle
an e-Hub
•Merge
•Demonstrable
•
contribution to
partners
•Interface engine
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•Deep
•
understanding of
business processes
•
IS into CRM
Integration of
upstream systems
Highly trained
customer reps
Business
Option
Creation
Centralized
database
Data standards
KM and Business Options
Issues in Business Options
Exxon Mobil’s oil exploration
Virtual alliance organizations
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What options can be created among
virtually connected partners?
Who owns the business option?
Who bears the risk of the IT
investment?
? What role does the bargaining power of
the partner play?
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Source: Wall Street Journal
August 17, 2004
Option creation in e-hub environments
Options creation in eHub environments
Example: Cisco-led e-Hub (now i-Hub)
Who will benefit?
Knowledge
Bearing
Component
Partner A
Partner B
Partner (N)
Knowledge
Bearing
Component
Knowledge
Integration
Knowledge
Integration
(IT ’s role)
(IT ’s role)
Cisco
Partner C
Partner E
Business
Option
Creation
KB
Business
Option
Creation
KI
OC
Partner D
KB
OC
KB
KI
KI
OC
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Traits of options exploiting
organizations
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An ambidextrous organization?
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Flexible yet stable business processes
Encourages taking risks while rewarding successes
Has visionaries as well as doers
Insulates risk-takers from nay -sayers
Thinks ‘integration’ of systems, data, customers
Cold reality
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Not all firms have the $ to take on risks
Few options will be successful
There will be false-starts
People will get ‘ burnt out ’
Serendipity will play a role
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